Accounting looks backward

It keeps a business honest, satisfies the tax authority, gives lenders something they can trust, and catches mistakes. The French phrase chien de garde, watchdog, fits well. But a watchdog watches what is already inside the fence, not what you plan to build next. A manager's daily work points forward: what will run next month, who will carry it, what it will cost and how long it will take. This part is about the difference, why both are needed, and why a map of a business is a plan that sits beside the books, not a replacement for them.

What accounting is for

Accounting exists so that other people can rely on what a business says about itself: the tax authority, a lender, a partner, an insurer. So may you, on the days you want to know whether the business is really doing what you believe it is doing.

To do that job, accounting has to follow rules. Entries must be supported. Records must be complete. Figures must be consistent from one period to the next, so that this year can be compared with last year. The bookkeeper or accountant who keeps those rules is protecting the business, and protecting you.

That is the sense of chien de garde. A good watchdog does not decide where the household goes on holiday. It makes sure the doors are locked. You want one.

So nothing in this part is a complaint about accountants. Their work is careful and necessary. The point is only that a tool built to report the past is a poor tool for steering the future.

Three ways the books look backward

There are at least three reasons the books cannot, on their own, tell you where you are heading. None of them is a flaw. They follow from what the books are for.

They describe the past. An entry is made after something has happened. A sale is booked after it is made. An expense is booked after it is incurred. What you are considering today is not in them at all: a new step, a different schedule, a new customer type has no line yet.

They arrive with a delay. Books are usually closed at the end of a period. Invoices are matched, accounts reconciled, adjustments made. Then the statements are produced. By the time you see a month's figures, that month is over, and the next one is well under way. You can be right about where you were and wrong about where you are.

They use categories built for reporting. A business's accounts are arranged so that statements can be prepared, taxes computed and results compared across periods. That usually means categories like wages, materials, rent, insurance and utilities. Those are the right headings for a statement. They are less helpful for a decision such as "what does it take to run this particular piece of work?" A single piece of work draws on several headings at once, and a single heading is spread over many pieces of work. The books know what the business spent on wages. They do not, by design, say which activity those wages were carrying, or what would change if the activity changed.

Accountants know all this. Many are glad to help with budgets and forecasts, and a forecast built on well-kept books is better than one built on memory. But a forecast needs a forward-looking view of the work as an input. The books supply the history and the discipline. They do not supply the picture of how the work is arranged.

The manager's questions point the other way

Think of what a manager actually has to decide in a normal month.

• What work is going to run, and when?
• Who carries each piece of it, and how much of their time is genuinely available?
• What will it cost, roughly, in money or in whatever measure the business uses?
• How long will it take from start to finish?
• What would change if we changed one thing?

Every one of those questions is about something that has not happened yet. None can be answered by looking up a past total, though past totals can help you estimate.

It is a difference in tense. Accounting speaks in the past tense and the manager must speak in the future tense. The best decisions come from using both: a plan, written down where others can see and question it, and a record, kept to the standards others rely on, to hold the plan up against.

When the two are mixed up, trouble follows in a predictable direction. If the books are used as the plan, the business steers by last quarter's numbers and is slow to notice that the work has changed. If the plan is used as the books, the business claims to know what happened when it only knows what it expected. Keeping them as two separate things, each honest about what it is, is the safer arrangement.

A worked example

Northline Fabrication is invented, for illustration only.

Northline Fabrication makes custom steel gates and brackets: quotes, cutting, welding, finishing, shipping. Marta runs it, with Sam welding and Luc finishing. Her bookkeeper keeps clean books and prepares the year-end figures with an accountant.

Marta is thinking about a second welder, either a new hire or a second welding station for Sam. She asks what the books say.

They tell her a good deal. Last month: sales of $38,000. Steel purchases of $11,500. Wages, rent, power and insurance. The bank balance today. A lender would want exactly this, and she is glad to have it.

What the books cannot tell her is what she actually needs to decide:

• Where is the wait? Gates sit between cutting and welding, because one welder cannot keep up. The books show wages. They do not show that eight jobs are queued, or that each one waits about nine days.
• What would a second welder change? Welding is the constraint now. If it doubles, the queue may simply move to finishing, which has one person, Luc, and one booth. The books have no line for that.
• When would it pay back? A hire costs wages for several weeks before the extra jobs ship and are paid for. The steel for those jobs is bought first. The books will show this, but only after the fact, and Marta would rather see the shape first.
• What would it displace? If the second station goes where finished gates are staged for shipping, something has to move.

So she draws it. One block each for quote, cut, weld, finish and ship. For each, she writes a rough duration, who carries it and a rough cost in dollars, stating the currency. In the description of the cutting block she writes that about two weeks of steel are usually on the rack, and that the supplier takes five days to deliver. In a Note beside the shipping block she writes that customers often pay half on order and half on delivery. The map does not keep those figures current; she does.

Two duration estimates she leaves blank. When she asks the map to calculate, it counts them as zero and lists them as counted as 0, so she can see they are gaps and not steps that take no time.

What the map gives her is not a verdict. It is something to look at: the Resources view shows welding and finishing demand against the capacities Marta stated. She can ask which estimate or arrangement deserves review: perhaps the first change should be smaller, or her numbers are wrong and Sam will correct them. She does not know yet, but she is now asking about the future with the future on the page.

Then she shows the bookkeeper. He is not threatened. He points out that two of her cost estimates leave out an insurance payment due in a particular month, and that the half paid on delivery means her cash timing will look different from her cost timing. He is right, and he knows because the books carry it. The plan gets better because the record is there. When the new welder has been in place for a quarter, the books will show what happened, and Marta will hold her plan up against them.

Reflection questions

1. Which decision you made recently would have been easier if you had seen the work and its cost laid out in advance, not only afterwards in the books?
2. When you read your monthly figures, how many weeks old is the situation they describe? What has already changed since?
3. Who in your business keeps the record, and when did you last sit down with them to talk about what comes next, not only about what has already been booked?